13 October, 2016
Here are my thoughts and comments on the Cridland State Pension age independent review: interim report.
As Cridland considers the options, Government has a chance to make State Pension policy fairer
Consider extending number of years for full pension, rather just than raising state pension age
- Current system gives higher state pension to people healthy or wealthy enough to wait and work longer, but often disadvantages those with longest working lives or poor health
- Continually increasing State Pension Age is not best way to control state pension costs
- State Pension is based on contribution principles – but 35 years is not a full working life
- Requiring longer contributions for full State Pension would allow long-service workers to get full State Pension sooner if they need to
- New State Pension rules has made state pension less fair – people may now pay full National Insurance for more than 15 years, for no extra State Pension
- Under old State Pension, people could build up more State Second Pension every year but new State Pension means no extra State Pension after 35 years
- National Insurance makes no provision for social care – Beveridge would have ensured such insurance
I am delighted to see that John Cridland has released his interim Report on how to manage State Pension Age policy in the long-term. I believe there are important issues that need to be opened up to national debate and it is good to see them starting to be aired. Cridland is right to focus on the three pillars – affordability, fairness and fuller working lives. These are all important issues and can help frame the way State pensions policy works better in future.
Current system gives higher state pension to people healthy or wealthy enough to wait and work longer, but often disadvantages those with longest working lives or poor health
The current State Pension system is increasingly seen as unfair. Those who reach state pension age in good health and with other private income can keep on working or waiting longer and achieve much higher state pensions when they do finally take them. Under the old system, people could get an extra 10.4% a year state pension for each year they delayed starting to take it. Under the new State Pension, people can still get an increase of 5.8% a year in State Pension if they can afford to delay their start date. By contrast, people who desperately need their state pension before they reach state pension age cannot receive any money at all and State Pension age has been rising sharply, as indeed has the age at which Pension Credit can start being paid to both men and women. This means the current system is penalising those who are in poor health, possibly due to having had very long working lives in physically demanding jobs. Socially, such a system seems inequitable and the groups with lowest life expectancy lose out significantly. This includes people in lower earning groups, but there are also major occupational, regional and income differentials in average life expectancy which have so far been ignored by the state Pension system. The current rules favour higher earners, living in more prosperous areas and who have less strenuous jobs, or are in good health. A balance needs to be struck between controlling costs and improving social fairness.
Continually increasing State Pension Age is not best way to control state pension costs – just look at the problems with Women’s State Pension Age changes
The Government should carefully consider whether just increasing state pension age is the optimal way to control costs. I believe there needs to be a different mechanism than purely using average life expectancy, or chronological age. A more considered approach would focus on length of working life and number of years contributing to the National Insurance system. At the moment, the dice are all loaded in favour of the healthier and wealthier members of society, who get more State Pension per year and for more years than other groups.
State Pension is based on contribution principles – but 35 years is not a full working life
The National Insurance State Pension has always been based on the contribution principle – if you contribute to the country for enough years, you will be entitled to a full State Pension. When Beveridge designed our system, he considered a full National Insurance record would be 44 years for men and 39 years for women. Since the 1940s, average life expectancy has increased significantly but the number of years for a full record is now only 35. If you have lived in the UK all your life, 35 years cannot possibly be considered a ‘full’ working life.
New State Pension rules has made state pension less fair – people may now pay full National Insurance for more than 15 years, for no extra State Pension
Those who left school at 16 would be just 51. Those who went to university and started working at 21 would be just 56. That means, people will be contributing National Insurance for many years, but will not get any more state pension at all. By contrast, those who have only lived in this country for part of their lives could get the same State Pension as people who have lived and worked here much longer – and paid far more into the National Insurance system overall. National Insurance contributions from both employee and employer amount to over 25% of average salary – yet no further pension accrual will be earned for this sum once people reach the 35 year threshold, meaning many people who did not go to higher education will be disadvantaged in the State Pension system.
Under old State Pension, people could build up more State Second Pension every year but new State Pension means no extra State Pension after 35 years
The unfairness of the State Pension system has been exacerbated by the new State Pension that started in April 2016. Under the new system the old rules that allowed people to keep on building some State Pension every single year have been abolished. Before April 2016, people could build up extra State Second Pension (S2P – the earnings related part of the State Pension) every year until they reached State Pension age. They would have built up a full Basic State Pension after just 30 years, but at least they could go on accruing more S2P each year, so their National Insurance contributions would give them some extra State Pension in retirement. (Those who were contracted out would be paying lower National Insurance and building up a replacement for this S2P in their private scheme).
Requiring longer contributions for full State Pension would allow long-service workers to get full State Pension sooner if they need to
Therefore, the idea of increasing the number of years required for a full State Pension makes sense. In future, rather than increasing State Pension age just because ‘average’ life expectancy has risen, it could be fairer to increase the length of time required for a full State Pension instead. If you reach State Pension age without a full record, you could still receive the relevant fraction of the State Pension – for example if you require 45 years and you have 40 years on your record, you would still get 40/45ths of the full amount.
Those caring for children or adults would still get credits towards their record, as would the unemployed or those who are too ill to work.
As with the current system, anyone who takes time out to look after their children or caring for older people, or unemployed or too ill to work would receive credits so that this does not damage their National Insurance record.
National Insurance makes no provision for social care – Beveridge would have ensured such insurance
The current National Insurance system is geared towards regular pension payments only. However, if Beveridge was designing the system today, he would certainly want to include an element of insurance to cover social care costs. Beveridge could not have imagined millions of elderly people living as long as they do now, being such a growing proportion of the population. In the 1940s, life expectancy was much lower and medical research had not developed to allow people to live with chronic conditions until much later.
The measure of ‘up to’ one third of adult life living on a state pension is far too crude. Given the vast differentials in life expectancy across the country and across occupational or income groups, this arbitrary measure hides significant unfairnesses. A more sophisticated and equitable approach is required.